With our upcoming presidential election, a great question has emerged once again as a hot button that cannot be ignored: "Are Americans better off today than they were four years ago?" Pundits and politicians from across the spectrum are having a field day with this question, trying to score political points.
But, honestly, who cares about political points? Investors care only about what the future of America looks like, so they can make proper investment decisions - and they could do without the political speculation. This question may have arisen due to politics, but now, regardless of its origin, it needs a real answer. So, do you think Americans are better off today than they were four years ago?
Sadly, we think the answer is no, and the reasons are far different from anything you will hear from either side of the political aisle. No, the reasons we think America is clearly worse off deals with investors taking on too much uncalculated risk in multiple market spaces, the fact that literally almost everyone missed the market recovery, and the reality is that too many Americans now believe in a "new normal" when it comes to the future of America.
The Scary Reason Everyone Was So Hyped About Facebook:
In almost any discussion, people will initially point out that the hype around Facebook's (FB) IPO centered around one point: It is unbelievably successful, relative to online popularity! And now, even Joe Schmoe - not just venture capital titans - can get a stake in the game with this golden goose.
Sound about right to you? I know it must, because I heard it every day in Silicon Valley, where I lived no more than five miles away from Facebook headquarters for nearly two years! Still, the startup juggernaut's success relative to online popularity has had little correlation with its current level profitability. FB has not only fallen over 40% but today it still trades with a P/E of 79. This clearly illustrates a high level of continued investor speculation that centers around vanity metrics instead of fundamentals.
The real reason investors were hyped up: Four years had gone by since the 2008 crash and nothing even remotely interesting - let alone a high-profile and presumably successful company - had IPO'd in America. This was the first real chance for people to once again invest in unbridled, disruptive American innovation and make money like old-fashioned capitalists simply by buying a stock. It was the sign to start rebuilding personal portfolios…at least that's what everyone hoped was true.
Still, there was an ugly truth that came with this picture: America and its investor base were completely confused after four years of hell on earth and Great Depression-level market gyrations. They had no idea how to even discern the difference between up and down.
The outcome of this was the most overhyped and overpriced IPO to ever hit the market, and then to watch it crash down like the Hindenburg in less than a month. Both institutional and retail investors showed complete disregard for due diligence and risk management. Mark Zuckerberg, founder and CEO of Facebook, even warned potential IPO investors of the risks involved and expressly stated that the company's current focus had nothing to do with profitability or shareholder returns, but rather its social mission (among other things). Nobody listened, however, and the rest is history.
This IPO illustrated the pent-up desperation, confusion, lack of risk management, and recklessness that now exists in America. Almost everyone who got into Facebook seemed absolutely desperate to expand their portfolios with something new and to buy growth regardless of the risk involved. America was built by taking risks, but they were calculated risks, not some form of reckless financial Russian roulette accompanied by one-too-many shots of vodka with some old comrades in the back alleys of Moscow.
The Market Recovery That No One Cares About:
Bulls, economists, pundits, and the like who say Americans are better off today often point out that the stock market has made a dramatic recovery compared to four years ago. That's a completely valid point at face value - but then reality sets in. The reality is that both retail and institutional investors missed most of the market recovery.
If most investors had recouped almost every penny back from the Dow (DIA) lows to where the Dow is now trading, then the net worth of many Americans should be pretty close to pre-recession levels. But they didn't - and it isn't. Even for those who recouped almost everything, they are simply at slightly negative to 0% portfolio growth over the last four years…hardly anything to really brag about because it sounds eerily similar to Japan's Nikkei performance.
I concede that if most Americans saw their net worth largely recoup to pre-recessionary levels, then America would be, in some important ways, better off today than four years ago. This isn't the case though, and that's why we're clearly worse off.
The Problem With America Believing in a "New Normal"
Actor Will Smith once said, "The fastest path to mediocrity is by being realistic." How does this relate to America? Never before has our country been realistic with itself till now and history proves it. America was born by winning its independence through armed revolution against what was the most powerful country in the world at the time. Manifest destiny expanded the country from the Atlantic to the Pacific. America won not one but two world wars, put a man on the moon just because we wanted to, and developed the World Wide Web that generated an innumerable amount of new industries. We did all of this because our people dreamed of doing the impossible and had the will to make it happen. American companies like JPMorgan (JPM), Exxon Mobil (XOM), and Wal-Mart (WMT) were built from the ground up by shunning terms such as "the new normal" or by being realistic.
Today America is worse off than four years ago not because the economy remains anemic, unemployment is stubbornly high, and the future still looks absurdly unclear. More insidiously, we are in tougher straits because many Americans have lost their belief in American exceptionalism. In the hearts and minds of Americans, it's being replaced by this idea of a "new normal" of mediocrity.
The Way To Profit - Even When You're Worse Off Four Years Later
Now here is the follow up question that really matters and no one is asking: "How do Americans profit, now that we are worse off four years later?" Thankfully, the answer and the execution strategy is rather simple. Investors need to do their due diligence and invest in top-quality U.S. value stocks. Invest in U.S. companies that lead their industries, names that hold competitive advantages worldwide over competitors, and companies that not only hold real growth potential relative to their circumstances but understand the concepts of profitability and shareholder return. A starting point would be to review the companies listed above.
If any investor, anywhere in the world, wants to make money as the US emerges from four dreadful years, listed above is one easy way it can be done. It's not rocket science - it's prudent and consistent investing. The takeaway is something Warren Buffett has proven time and time again. This simple strategy works for investors who want to make money in America regardless of how the country is doing in the current period.